Rule-Based Detection and Trading of Megaphone Patterns
Summary
This article outlines an indicator for detecting bullish and bearish megaphone formations, also called broadening patterns. It defines each formation through four alternating swing points: highs and lows expand outward, while a proportional range limit is used to reject structures that have grown too large relative to their initial range.
The proposed process scans a configurable candle history for swings confirmed by neighboring bars, then refines those anchors to the actual extremes within each leg. It draws trend line boundaries and rejects structures where candle closes have already violated a boundary. After the fourth swing, a close beyond the relevant boundary confirms a breakout; the pattern’s geometry is then used to project a stop and a measured-move target.
The text provides a design framework rather than validation through historical results. It does not report profitability, robustness tests, or performance across markets and timeframes, and the example proportion threshold is a configurable design choice rather than an established universal rule.
Key ideas
- A megaphone pattern is defined by alternating swing highs and lows that expand outward.
- Swing points are confirmed using neighboring candles and refined to the extremes within each price leg.
- Trend line closes and a proportional expansion limit are used to screen candidate formations.
- A breakout signal requires a candle close beyond the pattern boundary after the final swing forms.
- The proposed stop and target levels derive from the distance between the pattern boundaries.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.